A multisided platform business model is a company that leverages multisided network effects (coming from two or more sides of the network). Therefore, when one side of the network grows, this makes the overall platform more valuable for the other side of the network and vice-versa, triggering exponential growth for the platform business.
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model’s success.
In short, there are a few elements that define a platform business model:
Interactions vs. sales
A platform business model focuses on enabling an underlying ecosystem of third-party players that can build their own companies on top of the platform.
In short, the platform business is more concerned about the health of the overall entrepreneurial ecosystem, underlying it, that the sales of its own products.
In fact, oftentimes, for platform business models, most products and services sold, on top of it, are by third parties.
And if the platform enables the sales of physical products, those might be primarily sold by third-party stores (see Amazon business model).
Transactions between the main parties of the network
Usually, a platform business model measures its financial success according to the gross value of the overall transactions happening on the platform.
In 2021, Airbnb generated enabled $46.9 Billion in Gross Booking Value, and it generated $6 Billion in service fee revenues. In 2021, there were $300.6 Million Nights and Experiences Booked, ad an average service fee of 12.78%, at an Average Value per Booking, of $155.94.
Take the Airbnb business model economics. The company enables a gross booking value of almost $47 billion in 2021.
As a consequence of that, it generated an almost $6 billion tax, in service revenues.
One user type network improvement, also exponentially improves the other sides of the network
A platform’s network is highly interconnected. This means that by improving a side of the network, you also improve the other side.
However, often, when platform business models kick off their operations, they need to figure out which side of the network, they need to kick off first.
For instance, in the case of Uber Eats, the choice was simple. Since the company had already millions of drivers and users, it only needed to add restaurants/partners to kick off the whole network.
Instead, if you take the case of Uber, initially, to make its network valuable in the first place, it had to pick one side of the network: drivers.
In fact, as drivers became available, the company could kick off its network effects, by offering rides across various neighborhoods, cities, and countries, at competitive rates, and low wait times.
Flywheel vs. funnel
The sales funnel is a model used in marketing to represent an ideal, potential journey that potential customers go through before becoming actual customers. As a representation, it is also often an approximation, that helps marketing and sales teams structure their processes at scale, thus building repeatable sales and marketing tactics to convert customers.
Where the sales funnel is used with a linear logic (and more in line with traditional organizations). When it comes to platform businesses, it’s all about feedback loops.
Those feedback loops move in all directions, as they help the network solidify.
Thus, as a platform, it’s critical to think in terms of flywheels rather than funnels.
This leads us to another key point.
Growth engines, vs. business development
In the Lean Startup, Eric Ries defined the engine of growth as “the mechanism that startups use to achieve sustainable growth.” He described sustainable growth as following a simple rule, “new customers come from the actions of past customers.” The three engines of growth are the sticky engine, the viral engine, and the paid engine. Each of those can be measured and tracked by a few key metrics.
Indeed, think of the case of Uber Eats which needs to go out and find a restaurant network and partners willing to join the platform.
This is a complex deal, which requires experienced business people, able to navigate the deal and unlock it.
Once these deals are closed, while business development (especially for platform leveraging enterprise customers) will be an integrated part of the overall business model, growth engines become critical.
A growth engine is simply an integration between product, marketing, and distribution. Where within the platform there are built-in incentives to distribute the network.
Take the case of the Amazon e-commerce platform, with millions of freely accessible product pages, which prompt billion of users to see them. The underlying platform is both a technical platform, supporting thousands and thousands of third-party stores and a distribution engine!
Understanding network effects
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.
In the table below, we structured how network effects are kicked off:
Definition Network Effects: The value of a service/platform increases for each additional user, as more users, join in.
Sub-type
Description – Example
Direct, Same Side, or One-Sided
As more users join, the platform’s value increases for each additional user. Take the case of a social media platform, like Facebook, Instagram, TikTok, LinkedIn, Twitter. The more users join, the more the platform will be valuable for each additional user, as the new user might find exponentially richer and broader content (provided the platform can prevent congestion or pollution).
Indirect or Cross-Side
In this case, a user type joining the platform makes it more valuable for other user types. Take the case of LinkedIn. While LinkedIn enjoys the same-side network effects, the platform becomes more valuable to users looking to enhance their careers as more users join in. At the same time, LinkedIn enjoys indirect or cross-side network effects. More users who join the platform to grow their career make it more valuable for recruiters (so a different user type) as they can find more qualified candidates on top of the platform.
Two-Sided
Take the case of LinkedIn. While LinkedIn enjoys the same-side network effects, the platform becomes more valuable to users looking to enhance their careers as more users join in. At the same time, LinkedIn enjoys indirect or cross-side network effects. In this case, a user type joining the platform makes it more valuable for other user types. More users who join the platform to grow their career make it more valuable for recruiters (so a different user type) as they can find more qualified candidates on top of the platform.
Multi-Sided
In this case, more than two user types are driven by the network dynamics. Take the case of Uber Eats; the more restaurants join the platform, the more the platform becomes valuable for eaters. While at the same time, by leveraging its existing platform, Uber drivers have additional riding options. So they can earn extra income by delivering food instead of giving rides. That makes the overall platform much more valuable for the three main user types: eaters, restaurants, and riders.
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. Negative network effects (congestion or pollution) reduce the value of the platform for the next user joining.
Below, instead we explain the curse of platform business models: negative network effects:
Definition Negative Network Effects: The Value of the service/platform decreases for each additional user, as more users join in. This might be due to congestion (when increased usage can’t be handled by the platform) or pollution (when the increased size of the network makes it hard to incrementally add value, and instead its value shrinks).
Description – Example
Congestion (Increased Usage)
In this case, there is a reduced quality of the service when certain parts of the networks carry way more data than they can handle. That usually happens because of scale limitations and noise due to curation limitations. Since this is a technological issue, it manifests as service slowdown or perhaps the platform crashing. Take the case of services like YouTube crashing for too much traffic. Or, if you’re a professional, a service like Slack crashes as it cannot handle the traffic spikes. That becomes a disservice with potential negative network effects because you suddenly prevent a whole team from functioning properly. Therefore, a negative network effect can have exponential negative consequences. For instance, users would switch to alternatives en masse if this was repeatedly happening, thus creating structural damage to the network.
Network Pollution (Increased Size)
The case of pollution is more tied to the ability of the platform to keep its service relevant at scale. Thus, imagine the case of a platform like Twitter, in which the principal asset is the feed. As Twitter becomes more and more popular, it needs to make sure that the user-generated content is qualitatively on target. Otherwise, the risk is for the user’s Twitter feed to become less relevant and lose value. Or imagine the case that many user-generated platforms face today, where spambots take over. Here, suppose the platform cannot handle this automatically generated content. In that case, it can quickly lose value, as the service becomes worthless for users (take the case of a user who has to spend an hour a day cleaning up the feed because of spamming).
The multi-sided platform DNA
Let’s see two case studies and examples of multi-sided platform business models.
LinkedIn Case Study
Take the example of LinkedIn, a platform for job seekers and recruiters.
Here the network effects dynamics are multi-sided, meaning that for more job seekers join LinkedIn, and enrich their profiles, the more the platform becomes valuable to recruiters.
And the more recruiters/companies join, the more the platform is valuable to job seekers.
LinkedIn is a two-sided platform running on a freemium model, where to unlock unlimited search and other features, you need to switch to a paid account. Acquired by Microsoft for $27 billion in 2016, LinkedIn made $5.2 billion in revenues in 2018 and had nearly 630M members by October 2019.
Uber Eats Case Study
Another example is Uber Eats, in which complex dynamics between eaters, drivers, and restaurants/partners, enable the company to leverage multi-sied network effects to grow the company.
Uber Eats is a three-sided marketplace connecting a driver, a restaurant owner, and a customer with the Uber Eats platform at the center. The three-sided marketplace moves around three players: Restaurants pay commission on the orders to Uber Eats; Customers pay small delivery charges, and at times, cancellation fees; Drivers earn through making reliable deliveries on time.
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.
In an asymmetric businessmodel, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
In an asymmetric businessmodel, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
